For a long time, pensions have offered a tax-efficient way to pass on wealth to the next generation.
Under current rules, most defined-contribution pensions sit outside your estate for Inheritance Tax (IHT) purposes.
This can mean they are passed on entirely free from IHT, particularly if death occurs before age 75.
What changes are coming to IHT?
From 6 April 2027, unused pension funds and death benefits will, in most cases, be included in the value of your estate for IHT.
These assets will become liable to up to 40 per cent IHT, depending on the size of your estate and any available allowances.
The exemption that currently allows pensions to be passed to children and other beneficiaries without tax will largely disappear, remaining only when passed to a surviving spouse or civil partner.
The reform applies irrespective of residency. British expatriates living in countries such as Portugal, Spain, France, Cyprus, Malta, or elsewhere will not be exempt from these changes.
With the current IHT thresholds frozen until at least 2030, more families will be drawn into the IHT net as asset values rise with inflation.
What can you do now?
- Review your pension value as part of your full estate.
- Revisit your beneficiary nominations. Leaving pensions to a spouse/civil partner can retain IHT protection.
- Consider drawing more from your pension during retirement to avoid leaving a large pot behind.
- Seek advice on asset restructuring if your estate approaches the IHT threshold.
Pensions containing property or illiquid investments may also require careful planning to avoid rushed asset sales.
Act now, not in 2027!
Early planning can reduce your tax exposure and spare your family from administrative delays later.
Speak to us today to make sure your pension plans are still working for your future.
